June 7 (Bloomberg) -- The world’s largest donut chain has
long sold itself as a pit stop.

“America runs on Dunkin’,” goes the company’s slogan, and
its customers typically stop in for a pre-work sugar-and-caffeine jolt and then split.

Now, in an effort to get customers to stick around and
visit after the morning rush, Dunkin’ Brands Group Inc. has set
in motion a cafe-style store redesign. With its earth tones and
jazz soundtrack, the new look echoes Starbucks Corp., which has
long provided a place for people to hang, sip coffee and surf
the Web.

Until recently, the attitude at Dunkin’ was that “life
finished” at 11 a.m., Chief Executive Officer Nigel Travis, 63,
said in an interview at the company’s headquarters in Canton,
Massachusetts. “We’ve attacked that mindset” with the new
store designs because Dunkin’ has been losing out on the
afternoon consumer, said the U.K.-born executive.

“We haven’t always been conducive to that relaxed
environment,” he said. “So soft seating, the ability to watch
TV, to listen to appropriate music and just do things slightly
slower than you would in the morning is what we think we’ve been
missing.”

Dunkin’ is joining an industrywide rush to upgrade
restaurants as quick-service joints jostle with boutique coffee
shops and such fast-casual chains as Panera Bread Co.

Wendy’s Co. is overhauling stores with flat-panel TVs,
fireplaces and cushioned seating. Seattle-based Starbucks’
capital expenditures will be about $1.2 billion, of which about
two-thirds will go to refurbish and improve cafes and build new
stores, in its fiscal 2013, compared with $856.2 million the
year before. The coffee seller has said it will renovate about
1,400 U.S. locations in the year ending in September.

Snack-Shop Growth

Dunkin’, which plans to double the number of stores to
15,000 as it pushes west across the U.S., is also looking to
retain its position in the fast-growing coffee and snack-shop
category. Sales at U.S. coffee shops rose 8 percent last year,
while those of limited-service burger eateries increased 5
percent and full-service restaurant revenue advanced 4.5
percent, according to Chicago-based researcher Technomic Inc.

Since a July 2011 IPO, Dunkin’ shares have more than
doubled. They rose 1.2 percent to $41.42 at the close in New
York. Dunkin’ is trading at a 4.7 percent premium to Starbucks
on a price-to-earnings basis, compared with trading at a
discount in January. Net income at Dunkin’ Brands may increase
42 percent to $153.7 million this year, while Starbucks profit
may rise 20 percent to $1.66 billion in its fiscal 2013,
according to analysts’ estimates compiled by Bloomberg.

Second Lowest

Dunkin’ stores could use some improvement, according to a
2012 survey from Nation’s Restaurant News and WD Partners. The
chain tied for the second-lowest atmosphere score among beverage
and snack shops, coming in below Starbucks, Krispy Kreme
Doughnuts Inc., Caribou Coffee and Tim Hortons Inc., the report
showed. Starbucks received the highest score.

So far, Dunkin’ has opened about 90 of the new stores and
plans to have as many as 600 by year-end. Franchisees can choose
from four options, which cost between $175,000 and $250,000 for
a remodel and between $400,000 and $700,000 to build new. The
fanciest can include stained-poplar rails, faux-leather chairs
and glass partitions with LED lights that change hues -- bluish
light is said to have a calming affect while store owners can
switch to red or green for the holidays.

There are four color schemes, including Dark Roast and
Cappuccino Blend. The most-expensive version, dubbed Jazz Brew,
has dark orange and brown cozy booth seating, as well as hanging
light fixtures that lend a soft glow to wall murals printed with
words such as “break,” “fresh” and “quality.”

Digital Menu

Getting franchisees to buy in is particularly important for
Dunkin’ because 99 percent of its stores are owner operated. “A
lot” of owners are volunteering to remodel their stores and
more than 1,000 shops are putting in $13,000 digital menu
boards, Travis said. Dunkin’ Donuts franchisees are required to
remodel their stores at least every 10 years.

“We can compete with Starbucks now,” said Yini Castaneda,
manager at a remodeled Dunkin’ Donuts shop in downtown Chicago
across the street from a Starbucks store. The location is doing
more business in the afternoon -- the store gets about 50
customers during lunchtime now, compared with about 15 before
the remodel earlier this year, she said.

Customers “actually do a lot of interviews here now; they
sit down and have meetings,” said Castaneda, whose store
features a new digital menu board, glass cases displaying
croissants, as well as more electric outlets for laptops and
smartphones. A sign in the window says “Free Wi-Fi.”

Grazing Americans

Dunkin’ is catering to the increasing number of Americans
who graze and eat between meals, said Andy Barish, a San
Francisco-based analyst at Jefferies & Co., who advises buying
Dunkin’ stock. The chain this month started selling breaded-chicken sandwiches with barbecue sauce and is advertising iced
teas and coffees for a discounted 99 cents from 3 p.m. to 6 p.m.
to encourage afternoon noshing.

The donut chain has room to sell more afternoon fare.
Starbucks’ U.S. stores generate about 50 percent of sales after
11 a.m., compared with 40 percent of sales at Dunkin’ Donuts.

Relaxing music and dimmer lighting changes a restaurant
from a grab-and-go place to a destination, said Brian Wansink,
professor of marketing at Cornell University in Ithaca, New
York, and author of “Slim by Design: Mindless Eating Solutions
for Everyday Life.” Dunkin’s new designs may help it pull
customers from fancier cafes and restaurants, he said.

“It can compete on the taste of its coffee and the taste
of its pastries -- of which a lot of people really, really
liked,” he said. “They just didn’t like the atmosphere.”